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The Obama Campaign’s False Premise

In my critique of President Obama’s 17-minute campaign documentary, “The Road We’ve Traveled,” I took issue with the claim, now taken as a truism by Obama supporters, that he inherited the worst economy since the Great Depression.

I argued that the economy Ronald Reagan inherited was sicker, and I want to elaborate on that assertion.

In his superb biography of the Reagan presidency The Age of Reagan, Steven Hayward reminds us that the nation’s economic conditions “began slipping toward near panic in the two weeks after the 1980 election.”

Prime interest rates were around 19 percent. Inflation was in double digits, with forecasts that food prices would rise by more than 10 percent in the coming year and energy prices by 20-40 percent. Unemployment stood at 7.4 percent (it would eventually rise to 10.8 percent in the early years of Reagan’s presidency). Housing starts were in free fall. And auto sales were down 10 percent from the previous year.

I remind people of this only because the narrative that no president has faced more daunting challenges than Mr. Obama is false. That doesn’t mean that Obama didn’t face substantial problems when he took the oath of office. He did; but they were not unprecedented by any means.

Moreover, unlike Reagan, the economy Obama inherited was in large part an economy of his (and his party’s) own making. I say that because, in the words of AEI’s Peter Wallison, the “sine qua non of the financial crisis was U.S. government housing policy” — and that “far from being a marginal player, Fannie Mae was the source of the decline in mortgage underwriting standards that eventually brought down the financial system.”

Would it be too indecorous to point out that the Bush administration warned as early as April 2001 that Fannie and Freddie were too large and overleveraged and that their failure “could cause strong repercussions in financial markets, affecting federally insured entities and economic activity” well beyond housing?

In fact, President Bush’s plan for reform would have subjected Fannie and Freddie to the kinds of federal regulation that banks, credit unions, and savings and loans have to comply with. In addition, Republican Richard Shelby, then chairman of the Senate Banking Committee, pushed for comprehensive GSE (government-sponsored enterprises) reform in 2005. And who blocked these efforts at reforming Fannie and Freddie? Democrats such as Senator Christopher Dodd and Representative Barney Frank, along with the then-junior senator from Illinois, Barack Obama, who backed Dodd’s threat of a filibuster (Obama was the third-largest recipient of campaign gifts from Fannie and Freddie employees in 2004).

In other words, Democrats bear the majority of the blame for blocking reforms that could have mitigated the effects of the housing crisis, which in turn led to the broader financial crisis. So Mr. Obama and his party bear a substantial (though not exclusive) responsibility in creating the economic crisis that Obama himself inherited.

Just for the record.

Oh, and one other point: When Ronald Reagan inherited what really was the worst economy since the Great Depression, he actually took steps to revive it; and his efforts led to an extraordinary period of sustained economic growth. That allowed Reagan to run on his “Morning in America” theme and win re-election while carrying 49 states.

Mr. Obama, on the other hand, has helped produce the weakest recovery since the Great Depression, with many economic indicators getting worse, not better, under his watch. Which is why Obama, unlike Reagan, should lose his bid for re-election.